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Capacity management is the key

Capacity management is the key
Currently, over 10% of the liner shipping fleet is idle as capacity additions exceed demand growth.

Currently, over 10% of the liner shipping fleet is idle as capacity additions exceed demand growth.

Currently, over 10% of the liner shipping fleet is idle as capacity additions exceed demand growth. Far too much of this idle capacity is owned tonnage, rather than charter tonnage. Analysis The effects of excess supply in container shipping was predictable, even if demand had not dropped off severely. Five consecutive years of supply growing faster than demand made this unavoidable.

The charter market hovers at break-even levels for most operators and each week a greater percentage of the fleet goes idle. The spectre of zero rates on some routes raises the probability of significant losses for all shipping lines.

Despite this, a sizeable percentage of the operating fleet is represented by chartered-in tonnage. Only a minority portion is on shorter-term or maturing time charters where the vessels can be redelivered without penalty. At some point, where corporate survival is at stake, charter defaults will occur, similar to what has happened in dry bulk shipping.

So far, governmental stimulus packages are primarily focused within, and do not appear to be structured to aid the short-term recovery of container shipping demand. Maersk had the foresight to reduce chartered-in tonnage over the last two years, but is still left with a large capacity overhand. Unlike smaller competitors, Maersk may have the market clout to actually escape from charters and newbuild contracts with a minimum of expenditure.

From the perspective of KG funds and companies like Seaspan, the immediate future is not pretty. In many cases, charter renegotiations will be insufficient to meet their customer's requirements. Arbitration and litigation is not preferable, both due to cost and cash-flow impacts. A better bet would be to negotiate a lay-up charter rate that covers actual cash outlays yet reverts to a higher average charter rate at a predetermined future date. Assuming the charter owner can absorb the decline in current cash-flow, this may be the best bet to avoid widespread defaults.

www.TurkishMaritime.com.tr

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